Are you a restaurant owner wondering about profit margins? If so, you've come to the right place!
In the past, profit margins in the restaurant industry would vary from 0 to 15% on average. But at present, profit margins have fluctuated between 3% to 7%. Everything is dependent on the performance of the restaurant though.
Every restaurant owner has their own profit goal, but everyone appreciates an increase in the profit margin. Although it is clear that profit margins have reduced compared to the past, there are still ways you can raise yours to your target figure.
In this article, we are giving you a complete guide to restaurant profit margins! So, just keep on reading!
Computing for Restaurant Profit Margins
When you own a restaurant, you are faced with 2 types of profit margins: restaurant gross profit margin and restaurant net profit margin.
Let’s take a look at these two in more detail:
Restaurant Gross Profit Margin
Gross profit is the amount in your pocket that remains after subtracting all the costs of goods sold.
Here is the formula:
(Price of meal - Cost of goods sold) / Selling price x 100 = Gross profit (%)
In your Italian bistro, you’re selling a pasta meal at $20 and it costs $9 to make it, your gross profit margin stands at 55% because ($20 - $9) / $20 = 0.55 x 100 = 55%
Restaurant Net Profit Margin
Net profit margin is the figure you rely on to identify if your restaurant is successful and producing the profits you want. It’s calculated by subtracting your business operation expenses from the gross profit.
Business operation expenses refer to rent, payroll, utility bills, equipment leasing fees, taxes and even administrative costs.
Here is the formula:
Total revenue - Total expenses = Net profit
Net profit / Revenue x 100 = Net profit margin (%)
Your Italian bistro’s revenue was $120,000 and the business expenses was $80,000.
Your net profit margin stands at 33% because $120,000 - $ 80,000 = $ 40,000 / $120,000 = 0.33 x 100 = 33%
Average Restaurant Profit Margins per Restaurant Service Type
Restaurant profit margins tend to get affected by the following:
- Cost of goods sold
Knowing that, let’s look at the average restaurant profit margins for full-service restaurants, fast food restaurants and food trucks.
1. Full-Service Restaurant Profit Margins
Typically, full-service restaurants hit around 3-7% profit margin. However, this is dependent upon several factors such as prices, location, number of kitchen crew and the size of the restaurant.
2. Fast Food Restaurant Profit Margins
Fast food restaurants hover around an average of 6-9% in profit margins. The reason is because fast food meals are generally cheaper compared to the meals in full-service restaurants. There also tends to be fewer servers.
3. Food Truck Profit Margins
Similar to fast-food restaurants, food trucks also gain an average of 6-9% in profit margins. This is because there is reduced overhead costs since you don’t need to rent a huge physical space, pay for utilities or hire many kitchen staff members. Normally, only one to two people operate a food truck business.
Increasing your Restaurant’s Sales
Sales volume contributes greatly to improving your profit margins.
Here are some tips to do so:
1. Adopt an Online Ordering System
Integrate an online ordering system in your restaurant business to receive more takeout and delivery orders. Some people find it inconvenient to dine out and would much rather stay at home and order their food online.
2. Create a Loyalty Program
Loyalty programs incentivize your customers to visit your restaurant more often. They can also encourage referrals since customers are likely to talk about their loyalty rewards with their family and friends. It’s essential that your program is customer-friendly!
3. Improve your Menu Layout
Analyze the items on your menu. Determine which items and the bestsellers and which are most profitable, and then design a menu that features those items. Including images of these items is a great idea.
Additionally, you can try altering food names and descriptions on the menu to ignite more interest.
4. Invest in Technology
Use a Point of Sale (POS) software that gathers analytical data efficiently. Although investing in technology can be costly upfront, it will help you assess and improve your restaurant business operation. Thus, you will improve your profit margins over the long-term.
5. Market Online
In today’s age, your business will profit from having a good online presence. Many people find out about new restaurants through social media. So, be sure you are active on common social media platforms.
Also, many people go to a restaurant’s website for more information or to check out the menu. So, you want to make sure your website runs smoothly and is up to date.
Decreasing your Restaurant’s Costs
Here are some tips on how to decrease your restaurant costs to help your profit margin.
1. Lower the Cost of Goods Sold
One-third of a restaurant’s revenue typically covers the cost of goods sold. That’s why it’s important to lower the food costs without sacrificing the quality of your food.
Consider finding alternative suppliers where you can negotiate a lower price for similar ingredients. You can also work on reducing food waste.
2. Assess Labor Costs
A large portion of your revenue will also be allocated as payroll for your staff. You can strike a balance between managing the staff schedule for negligible overtime pay and providing more benefits. You can give additional bonuses to your staff when your monthly sales are beyond your target figures. You can also offer more rest days.
3. Be Mindful of Food Waste and Be Alert to Theft
Two of the huge issues in a restaurant business are food waste and internal theft. Improve the food inventory system and make it more accurate to avoid waste.
You can also install security cameras for monitoring and discouraging theft.
4. Boost Staff Morale to Lessen Turnovers
You want to make sure you care about your employees, so they work for you long term. Improve your communication skills, treat your staff well and make them feel appreciated as part of your restaurant’s growth.
It can affect your profit margin when you keep suffering from staff turnovers. Focus on building your workers’ loyalty.
As a restaurant owner, your goal should be to have the best profit margin possible. Though, your average profit margin will depend on the type of restaurant you own.
Regardless, there are many things you can do to increase your restaurant’s sales and decrease your restaurant’s costs.
We hope this article was informative for you. If you have any more questions or want more information, contact Greasecycle today.